Is it just coincidence that subprime foreclosures surged right
after the bankruptcy abuse reform (BAR) took effect in October 2005
(Chart 1)? (1)This article presents arguments and evidence suggesting
that it is not. Before BAR, any household could file Chapter 7
bankruptcy and have its credit card and other unsecured debts
discharged. By sidestepping their unsecured debts, households retained
more income to pay their secured debts, such as mortgages. BAR blocks
that maneuver by presenting a variety of obstacles, including a means
test that forces better-off households that demand bankruptcy protection
to file Chapter 13, where they must continue paying unsecured lenders.
(2) When the means test binds, cash-flow-constrained mortgagors who
might have saved their home by filing Chapter 7 are more likely to face
foreclosure.

Legal scholars and practitioners have long recognized how filing
Chapter 7 and discharging unsecured debts can help avert foreclosure:

... many debtors file bankruptcy precisely so that they can pay
their mortgage ... by discharging other debts (Berkowitz and Hynes 1999,
p. 3). (3)

[GRAPHIC 1 OMITTED]

If ... the value of your home is covered by your state's
homestead exemption, Chapter 7 may be the way to go ... by getting rid
of most of your other debts, keeping up the mortgage will be just that
much easier (Caher and Caher 2006, p. 190).

Our hypothesis follows directly from the first observation; if some
households demand Chapter 7 protection to avoid foreclosure, limiting
access to it should increase foreclosures. Our identification strategy
follows from the second observation; limiting access to Chapter 7 should
have a greater effect in states with high home equity exemptions. (4)
Bankruptcy exemptions are the opposite of collateral--they determine how
much home equity Chapter 7 filers can keep from unsecured creditors. We
reason that homeowners in states with low home equity exemptions are
less likely to demand Chapter 7, so the means test is less likely to
bind in those states. In textbook terms, we identify BAR as a
contraction in the "supply" of bankruptcy protection, and we
predict a larger impact on foreclosures in states with high exemptions,
and hence high "demand" for Chapter 7.

We extend our identification strategy by looking for differential
effects of BAR across different classes of household credit. We expect
BAR to reduce delinquency rates on unsecured loans in states with high
exemptions because lenders in those states were most exposed to losses
from bankruptcy before the reform. We contend that BAR will be unrelated
to prime mortgage foreclosures because prime mortgagors are, by
definition, unlikely to demand bankruptcy, regardless of exemptions.

We test our predictions by using difference-in-difference
regressions of mortgage foreclosure and loan delinquency rates estimated
using state-level quarterly data from 1998:1 to 2007:3. The results are
largely consistent with our predictions. Given home price appreciation
and economic conditions, we find that the increase in subprime
foreclosures after BAR was significantly higher in states with higher
home equity exemptions. Prime foreclosure rates, by contrast, were
unrelated to BAR. In still starker contrast, delinquency rates on
unsecured personal loans, which were made more secure under BAR,
decreased more after the reform in states with higher home equity
exemptions.

The estimated impact of BAR on subprime foreclosures is
substantial. For a state with average home equity exemptions, the
average subprime foreclosure rate over the seven quarters after BAR was
11 percent higher than the average rate before BAR. This translates to
about 29,000 more subprime foreclosures nationwide per quarter
attributable to the reform. (5)

Our study adds another candidate to the list of factors that may
have triggered the destabilizing surge in subprime foreclosures,
including declining home prices (Gerardi, Rosen, and Willen 2007),
expanded mortgage supply (Mian and Sufi 2009), looser lending standards
(Dell'Ariccia, Igan, and Laeven 2008; Demyanyk and Van Hemert
2007), and agency problems associated with securitization (Keys et al.
2010). Beyond those "usual suspects," we conclude that the
bankruptcy reform also played a role.

Although we study foreclosures, the mechanism by which we
hypothesize that BAR affects foreclosures begins with delinquency and
borrower behavior. Put bluntly, BAR increases the incentives of some
cash-flow-constrained mortgagors to quit paying their mortgage--rather
than quit paying some other debts and use the cash flow freed up to stay
current on their mortgage instead. (6) It does not, to our knowledge,
increase the incentive for lenders to foreclose on a delinquent
borrower. We study foreclosures instead of delinquency nevertheless
because foreclosures seem like the ultimate outcome of interest.

To say the reform was associated with more subprime foreclosures is
not to say that it did not serve its intended, first purpose of curbing
bankruptcy abuse. The strategy that BAR precludes in some cases is
defaulting on unsecured debts in order to make it easier to pay secured
debts. If that amounts to "robbing" Peter to pay Paul, then
the reform may have worked.

It could certainly be said that the timing of the reform was
unlucky, coming as it did near the end of housing boom characterized by
lax lending standards and regulation. No doubt those initial conditions
amplified the impact of BAR on foreclosures. It is possible that the
reform was wise policy that simply came at a bad time. (7)

The next section elaborates on how BAR reduced the supply of
bankruptcy protection and presents some circumstantial evidence
consistent with our hypothesis. Section 3 shows how the means test is
more likely to bind (and thus increase foreclosures) in states with high
home equity exemptions. In Section 4, we present regression evidence
suggesting that BAR did in fact contribute to the surge in subprime
foreclosures. Section 5 concludes.

2. Background on Bankruptcy and BAR

Bankruptcy is court protection of debtors from creditors and debt
collectors. While a person is in bankruptcy, a judge stays all
collection efforts--foreclosure, repossession of other assets, civil
suits, garnishment of wages, and dunning--while the court determines
which debts are discharged (forgiven) and which debts the borrower must
repay from asset sales or future income. That division depends on which
chapter of the bankruptcy law the borrower files under and the
bankruptcy exemptions in the filer's state. Under Chapter 13
(rescheduling), filers get to keep all of their assets but commit to
continue paying creditors out of future income for three to five years.
Under Chapter 7 (liquidation), filers keep all of their future income
but lose any home equity that is not exempt under their state's
bankruptcy law. Any unsecured debts, including credit card debt and
personal loans, that are not paid from the proceeds of liquidation are
discharged. (8) Importantly, the discharge of unsecured debts under
Chapter 7 leaves more income to pay a mortgage.

Table 1 summarizes how BAR changed filers' bankruptcy options.
While virtually all of the reform's changes raised the cost of
filing or reduced the benefit (protection), the means test may have been
the most important change. Before BAR, filers could choose which chapter
to file. Now, only filers with income in the previous six months below
the state median automatically qualify for Chapter 7 and the discharge.
Under Chapter 13, better-off filers whose means (defined as income minus
expenses recognized by the Internal Revenue Service, payments to secured
creditors, and priority payments) exceed $166.67 per month must continue
making payments to unsecured creditors for five years. (9) If Chapter 13
filers fail to make payments, the bankruptcy stay is removed and
creditors can resume collection efforts, including foreclosure. (10)

[GRAPHIC 2 OMITTED]

[GRAPHIC 3 OMITTED]

Before testing our hypothesis formally, we note some circumstantial
evidence in support of it. Chart 2 shows that filing rates under either
chapter remain lower than one would predict given economic and housing
market conditions. Note also that the ratio of filings (Chapter
7/Chapter 13) fell from about 3 (10/3.25) in 2004:4 to 2 (5/2.5) in
2007:3. The means test and other elements of the reform appeared to have
lowered aggregate bankruptcy "supply" and the relative demand
for Chapter 7. (11)

Shortly after BAR took effect, subprime borrowers in bankruptcy
(under either chapter) in a given month were only about half as likely
to remain current on their mortgages by the following month and twice as
likely to be foreclosed upon (Chart 3). This dramatic reversal is
consistent with the premise that bankruptcy became less protective after
BAR, though there could have been other factors--falling home prices,
for example--that were operating. (12)

Chart 4 demonstrates how higher Chapter 7 filings tend to improve
the performance of mortgages relative to that of credit card loans,
consistent with the premise that filing Chapter 7 is a way for
cash-flow-constrained debtors to stay current on their mortgage.
Relative performance is measured by the ratio of past due mortgages to
past due credit card loans on the books of banks. Although other factors
are driving the relative performance of Chapter 7 filings, the predicted
negative relationship is clear. Before BAR, the correlation between
filings and relative performance was -0.80 (p < .01); after the
reform, the correlation was 0.66 (p = 0.16).

[GRAPHIC 4 OMITTED]

While the circumstantial evidence above is suggestive, it is far
from definitive. What remains to be shown is that this evidence is not
just coincidental. BAR took effect at the same time in every state, and
other factors--namely, home price appreciation--changed at the same
time. To rule out the possibility that Chart 1 and the circumstantial
evidence are just coincidental, we rely on a cross-sectional
identification strategy that reveals the states where BAR should have
had the biggest impact.

3. BAR Is More Likely to Bind in High-Exemption States

We use a stylized example to demonstrate that BAR is more likely to
bind, and thus increase foreclosures, in states with higher home equity
exemptions. The intuition is that Chapter 7 is more protective in
high-exemption states, so limiting access to it will matter more.

Consider two people who are identical, except one lives in Alabama,
where the home equity exemption is $5,000, and the other lives in
Maryland, where the exemption is zero (Table 2). Both have $5,000 of
equity in their homes. For whatever reason, both find themselves income
constrained in the sense that their current income after taxes and
expenses cannot sustain their preferred rate of consumption. We present
in Table 3 their hypothetical monthly budgets.

As Caher and Caher (2006) point out, filing Chapter 7 is (or was) a
potential solution for debtors in this predicament, though the appeal
depends crucially on the debtor's home equity relative to the home
equity exemption in his or her state. If the Maryland borrower filed
Chapter 7, his credit card debt would not be discharged; even under
Chapter 7 protection, the judge would order him to sell
("liquidate") his house to settle his credit card debt. Absent
protection from credit card lenders, the Maryland borrower seems
unlikely to "demand" Chapter 7 as way of relaxing his
cash-flow constraint and avoiding foreclosure. In contrast, if the
Alabama borrower filed Chapter 7, all of her credit card debt would be
discharged and she would keep her $5,000 in home equity. The Alabama
borrower seems more likely to demand Chapter 7 than the Maryland
borrower as a way to relax her cash-flow constraint and avoid
foreclosure. Having her credit card debt discharged would free up $500
per month in income that she could put toward her mortgage payment.
After BAR, both borrowers could find their options limited. If both fail
the means test, Chapter 7 is not available to them. The key point,
however, is that the lost option of Chapter 7 matters more to the
Alabama borrower, because the Maryland borrower was less likely to
demand Chapter 7 before BAR.

Table 4 provides a stylized example of how the BAR means test is
more likely to bind and thus drive up foreclosures in states with higher
home equity exemptions. The table reports hypothetical but realistic
indicators of the relative probability that the Maryland borrower and
the Alabama borrower would demand Chapter 7 to avoid foreclosure before
and after the reform.

Suppose that before BAR, the Alabama borrower files Chapter 7 with
probability p [greater than or equal to] 0. Suppose further that the
Maryland borrower is [delta] percent less likely to file Chapter 7
because of the low exemption there. After BAR, we assume neither
borrower can file Chapter 7 because neither passes the means test.
Because the Maryland borrower was less likely to file Chapter 7 before
BAR, his demand declines by less than the demand of the Alabama
borrower. The difference-indifference in their demand--that is, the
difference in demand before and after BAR in the high-exemption state
less the difference in demand before and after BAR in the low-exemption
state--is -[delta]. (13) Because Chapter 7 demand declines more in the
high-exemption state, we expect foreclosures to rise more in those
states. We test that prediction in our analysis below.

The example above suggests that cash-flow-constrained Chapter 7
filers are more likely to remain constrained after BAR and thus more
likely to face foreclosure. Because high-exemption states will have a
larger fraction of constrained filers, we venture three hypotheses:

1. The surge in subprime mortgage foreclosure rates since BAR took
effect will be higher in high-exemption states.

2. Any change in prime mortgage foreclosures since BAR will be
invariant to state exemptions. Prime mortgagors are, by definition,
unlikely to demand bankruptcy protection, so BAR is unlikely to bind.

3. Any increase in unsecured consumer credit delinquency rates
since BAR will be lower in higher exemption states.

The third hypothesis follows from the fact that constrained Chapter
7 filers are more likely to have to continue making payments on
unsecured debts after BAR, so the delinquency rate on unsecured debts in
high-exemption states would be expected to fall relative to the rate in
low-exemption states.

The dependent variable [Y.sub.st] is the foreclosure rate on
subprime or prime mortgages, or the delinquency rate on personal loans
in state s at time t. [X.sub.st] represents four variables that might be
correlated with foreclosure or delinquency rates: median home price
appreciation (the year-over-year growth rate), the unemployment rate
(seasonally adjusted), logged real per-capita income, and the real
per-capita income growth rate (year-over-year).

We include only contemporaneous values of those control variables,
but we have confirmed our main results using lagged values as well (see
robustness tests below). [BAR.sub.t] is a dummy variable equal to 0 for
t on or before 2005:4 and equal to 1 for t after that date. [EX.sub.s]
is the single-filer home equity exemption in state s at 2005:4 divided
by the median home price in state s at 2005:4. [UNLIMITEDEX.sub.s] = 1
if the exemption in state s at 2005:4 was unlimited, 0 otherwise. (14)
We "freeze" exemptions at their 2005:4 levels to avoid
endogeneity between exemptions and foreclosure rates. We scale
exemptions in case a given exemption in say, California, provides less
protection than the same exemption in Idaho. Using unscaled exemptions
does not change our main results in any important way (see robustness
discussion). Scaled and unscaled exemptions are reported in Table 2. We
collect the exemptions data from state legislative websites to ensure
their accuracy as of 2005:4. To control for constant differences in the
dependent variables across states, we include a matrix of fifty dummy
variables (one for each state, plus Washington, D.C., less an omitted
state). These state-fixed effects allow for differences in the average
rate of foreclosures across states attributable, for example, to
differences in foreclosure protection and credit culture. To control for
constant differences in the dependent variable over time, we include a
sequence of dummy variables for all but one quarter-year in the sample
period. These time-fixed effects control for macroeconomic factors, such
as interest rates and the aggregate business cycle. It is important to
include these fixed effects, but we do not report the roughly 100
associated coefficients. Note that because the regressions include fixed
effects, the "own" effects of BAR, EX, and UNLIMITEDEX on
foreclosures are unidentified. The coefficients on the interactions--BAR
x EX and BAR x UNLIMITEDEX--measure the difference-in-difference of the
mean of Y. Said differently, those coefficients measure how the
difference in the mean of Y after BAR differs with EX or UNLIMITEDEX. We
predict positive coefficients on both variables in the subprime
regression, smaller or zero coefficients in the prime regression, and
negative coefficients in the personal loan regression.

We estimate the regressions using ordinary least squares and a
panel of state-quarter data from 1998:1 to 2007:3. The foreclosure data
are from the National Delinquency Survey published by the Mortgage
Bankers Association (MBA). The MBA collects its data from 120 lenders
with 44 million loans on one-to-four-unit residential properties. (15)
The American Bankers Association collects its data from a panel of 450
banks across the country. Summary statistics and sources for all
regression variables are presented in the appendix.

Regression coefficients and standard errors (clustered by state)
are reported in Table 5. The signs of the key coefficients are as
predicted. BAR x UNLIMITEDEX is statistically insignificant, contrary to
our hypothesis, but BAR x EX is significantly positive in the subprime
foreclosure regression and significantly negative in the personal loan
delinquency regression. (16) Both prime and subprime foreclosure rates
are negatively related to home price appreciation and unemployment, as
one would expect, but only subprime foreclosures depend on BAR.

The regression estimates imply that the impact of BAR on subprime
foreclosures is smaller, but of the same order, as the impact of slower
house price appreciation. The coefficient on BAR x EX in column 2
indicates that for a state with average home equity exemptions/median
home prices, the average subprime foreclosure rate over the seven
quarters after BAR was 11 percent higher than the average rate over the
period before BAR. (17) That translates to about 29,000 more subprime
foreclosures nationwide per quarter attributable to BAR. (18) By
comparison, a standard-deviation decrease in home price appreciation
increases the foreclosure rate 13.7 percent relative to the average.
Average annual house price appreciation over the seven quarters before
BAR was 8 percent higher than appreciation over the seven quarters
following BAR, implying 47,689 more subprime foreclosures outstanding
per quarter since the reform. (19) Thus, the impact of home price
deprecation is larger, but the impact of BAR is of the same order of
magnitude.

The main results in Table 5 are robust to several alternative
specifications. The inclusion of four lags of home price appreciation
and all other economic variables does not appreciably alter the
significance of the coefficient for BAR x EX. We also obtain similar
results when we control for the share of subprime mortgages that are
secured and the share with adjustable rates (though those data are
available only after 2004:1). For those regressions, we find that the
share of subprime mortgages that were securitized was positively and
significantly related to the subprime foreclosure rate, which is
consistent with the evidence in Keys et al. (2010) that securitization
agency problems contributed to foreclosures. The size and significance
of the BAR x EX coefficient do not change appreciably when we add those
extra controls, however. Use of exemption levels that are not scaled by
the median home price does not materially change the results.

We also find that omitting those states that experienced the
highest foreclosure rates--Arizona, California, Florida, and
Nevada--actually magnifies the impact of BAR on subprime foreclosures.
(20) While we believe that the robust coding we have used for
unlimited-exemption states is the preferable specification, simply
dropping these states does not appreciably alter the coefficient
estimates on BAR x EX.

5.Conclusion

Our study suggests that the bankruptcy abuse reform of 2005 may
have been one of a number of contributors to the destabilizing surge in
subprime foreclosures by shifting risk from credit card lenders to
mortgage lenders. The means test component of BAR gives credit card and
other unsecured creditors a stronger claim on borrowers' cash
flows, thus weakening the (implicit) claims of secured lenders on these
funds. By making it harder for borrowers to avoid paying credit card
debt, BAR made it more difficult for them to pay their mortgages, so
foreclosure rates rose.

Although proponents of the reform may not have anticipated that BAR
would have contributed to the surge in foreclosures, observers close to
the facts saw the wave coming. Alexis McGee, President of
Foreclosure.com, made this prediction six months before the reform took
effect:

People get in over their heads by further encumbering their homes
with equity lines of credit that are exhausted with purchases of
consumer products and services such as cars and expensive vacations.
Then, when interest rates rise, and home values stop increasing, they
can no longer refinance and file a Chapter 7 bankruptcy petition to wipe
out their [unsecured] debts and hold off foreclosure by their lender....
[Now] they must file under Chapter 13, and pay off their debt in 60
months or less. Middle income families in this position could face the
loss of their homes (Business Wire, April 25, 2005).

McGee was prescient.

It should be noted that BAR will not necessarily lead to higher
foreclosure rates in the steady state. Once borrowers have learned that
the bankruptcy rules have changed, they can be expected to reduce their
demand for unsecured debt to avoid the bind that BAR creates. If so, the
long-run impact of BAR on subprime foreclosures may be negligible.

(1) The full name of the reform is the Bankruptcy Abuse Prevention
and Consumer Protection Act (BAPCPA). We prefer BAR over BAPCPA because
it is pronounceable and because abuse prevention came first (White
2006).

(2) Chapters 7 and 13 are described in more detail in Section 2.

(3) Consistent with the argument, Berkowitz and Hynes (1999)
estimate that mortgage rates and the probability of applicants being
turned down for mortgages are declining in the level of homestead
exemptions.

(4) White and Zhu (2008) find that a substantial fraction of
Delaware filers in 2006 were bound by the means test. Of 586 households
that filed Chapter 13, 22 percent did not pass the means test and 89
percent owed unsecured debt. Among the 90 percent of Chapter 13 filers
that actually filed payment plans, 38 percent committed to repay
unsecured debts. The latter represent payments that were potentially
avoidable under Chapter 7 before BAR.

(5) BAR may have indirectly contributed to foreclosures via lower
home prices. To the extent that cash-flow-constrained borrowers were
forced to sell their homes in lieu of filing Chapter 7, the downward
pressure on home prices would contribute to foreclosures by leading to
"underwater" mortgages.

(6) Delinquent borrowers may have several options that avert
foreclosure. They may be able to execute a deed in lieu of foreclosure,
or short-sell the house, or modify their mortgage. Or they may be
willing and able to reduce their spending enough to fulfill all their
obligations. Delinquent borrowers without any of those or any other
options will wind up in foreclosure, so those worst cases are the ones
we study.

(7) In a longer version of this article (Morgan, Iverson, and
Botsch 2008), we show that an upside of BAR was cheaper auto credit.

(8) Note that mortgage lenders' claims are secured
(nondischargeable) under either chapter.

(9) Filers with monthly means between $166.67 and $100 cannot file
Chapter 7 if their means exceed 25 percent of their unsecured debts.
Filers with means less than $100 per month may file Chapter 7. See
http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm.

(10) Note that BAR does not change or preempt state home equity
exemptions, except for new homebuyers or newly domiciled residents. Our
identification strategy does not assume that exemptions were changed.

(11) We know from other evidence that those exemptions do affect
bankruptcy demand. Ashcraft, Dick, and Morgan (2007) find that the rush
to file Chapter 7 just before the bankruptcy abuse reform (Chart 2) was
highest among states with riskier borrowers and high exemptions. Risky
households demanded Chapter 7 while supply was high, and they demanded
it most where Chapter 7 was most protective of equity owners.

(12) Credit Suisse (2007) analysts first noticed that bankruptcy
filers after BAR were less likely to avert foreclosure. They concluded
that BAR had affected subprime mortgagors "profoundly."
Bernstein (2008) also argues that the surge in foreclosures might be
partly attributable to BAR. He does not provide evidence, however.

(13) An analogy might be even simpler than the stylized example. If
the state speed limit is 60 in one state and 70 in another, lowering the
federal speed limit from 75 to 65 would presumably limit demand for
speed more in the state with the higher speed limit.

(14) [EX.sub.s] = 0 when [UNLIMITEDEX.sub.s] = 1.

(15) See http://www.mortgagebankers.org/NewsandMedia/PressCenter/56555.htm.

(16) We lack a good explanation for why the unlimited-exemption
states (and Washington, D.C.) do not fit the regression line.

(17) The coefficient estimate in regression model 2 implies that
the mean foreclosure rate in a state with a mean exemption level
($25,245) was 51.5 (2.04 x 25.245) basis points higher after BAR than
before, an increase of 11 percent relative to the mean foreclosure rate
before BAR (4.64 percent).

(18) The average number of subprime mortgages outstanding over the
post-BAR period was 5,545,799, so an increase of 51.5 basis points in
the foreclosure rate in a typical (median-exemption) state implies
28,561 (.00515 x 5,545,799) more subprime foreclosures per quarter as a
result of BAR.

(19) A standard-deviation increase in the unemployment rate
increases the foreclosure rate about 13.4 percent. Unemployment rates
decreased almost 70 basis points on average since BAR, implying 20,059
fewer foreclosures per quarter.

(20) With those states excluded, the coefficients (standard errors)
on BAR x EX in the subprime foreclosure regression models (1 and 2)
become 3.55 (0.71) and 2.68 (0.70). The coefficients in the prime
foreclosure and personal loan delinquency regression do not change
appreciably when the four states are excluded.

The views expressed are those of the authors and do not necessarily
reflect the position of the Federal Reserve Bank of New York, the
Federal Reserve System, Harvard University, or the University of
California at Berkeley. The Federal Reserve Bank of New York provides no
warranty, express or implied, as to the accuracy, timeliness,
completeness, merchantability, or fitness for any particular purpose of
any information contained in documents produced and provided by the
Federal Reserve Bank of New York in any form or manner whatsoever.

* After the bankruptcy abuse reform (BAR) took effect in October
2005, foreclosures on subprime mortgages surged nationwide.

* Prior to BAR, overly indebted borrowers could file bankruptcy to
free up income to pay their mortgage by discharging unsecured debts; BAR
eliminated that option for better-off filers through a means test and
other requirements, making it more difficult to save one's home by
filing bankruptcy.

* A study of the reform suggests that BAR was associated with more
subprime foreclosures; BAR's effects were greater in states with
high bankruptcy exemptions, as theory predicts.

* For a state with an average home equity exemption, the subprime
foreclosure rate after BAR rose 11 percent relative to average before
the reform; given the number of subprime mortgages nationwide, that
translates into 29,000 additional subprime foreclosures per quarter
nationwide.

Donald P. Morgan, Benjamin Iverson, and Matthew Botsch

Donald P. Morgan is an assistant vice president at the Federal
Reserve Bank of New York; Benjamin Iverson is a graduate student at
Harvard University; Matthew Botsch is a graduate student at the
University of California at Berkeley.

Correspondence: don.morgan@ny.frb.org

The authors thank James Green, Christer Huffington, Carrie Irwin,
Munish Jain, Brian Melzer, and Edward Morrison for helpful comments as
well as colleagues and seminar participants at Brown University, the
Federal Reserve Bank of New York, the Board of Governors of the Federal
Reserve System, the Financial Intermediation Research Society, and the
Federal Reserve Bank of Chicago's Bank Structure Conference. An
earlier version of this article was circulated as "Seismic Effects
of the Bankruptcy Reform." The views expressed are those of the
authors and do not necessarily reflect the position of the Federal
Reserve Bank of New York, the Federal Reserve System, Harvard
University, or the University of California at Berkeley.